February 21, 2020
What are the best BTL mortgage options for London landlords?
As a landlord, in order to get the absolute most from your property portfolio, you need to ensure you secure the best mortgage deals and choose the right mortgage option.
Although buy-to-let (BTL) mortgages have only been around since 1996, they are becoming big business. The most recent English Private Landlord Survey found that 72% of landlords used a mortgage to buy or build their first rental property. BTL mortgages are said to cover around 61% of all tenancies.
There are also a record number of BTL products and lenders on the market, all competing for landlord business.
Here, we consider some of the best current deals. And the different types of BTL mortgage available.
What are the options?
Like traditional mortgages, there are various options on offer. These include fixed-rate, discounted variable, standard variable rate and tracker.
All have their pros and cons, and it will depend on your individual circumstances as to which is best for you.
The vast majority of BTL mortgages are interest-only. This means your repayments will only cover the interest accrued on your mortgage each month. The overall amount you’ve borrowed to bankroll the purchase remains the same until the end of the mortgage term.
Once the end of the term is reached, you’ll have to pay off the outstanding balance by selling the property. Another BTL mortgage would be required if you wanted to keep hold of the property.
Some BTL mortgages are available on a repayment basis. This is where you pay a combination of the interest and capital you owe each month. But these are much rarer and harder to source.
How is the BTL mortgage market performing?
BTL mortgage lending finished the last decade on a high, according to the latest UK Finance mortgage lending statistics.
The figures showed there were 5,700 BTL mortgages for new property purchases completed in December 2019. This was 3.6% more than December 2018.
Meanwhile, there were 13,300 remortgages in the BTL sector, up 2.3% on the same month in 2018.
“After a period of continuous decline, the buy-to-let market is finally starting to show signs that it is regaining strength, with purchase activity up 3.6% year-on-year,” Shaun Church, director at Private Finance, said.
He warned the government not to further regulate the BTL sector in the upcoming Budget, which could potentially damage the market again.
In recent years, the choice for landlords has been huge and varied. Analysis by Moneyfacts last year revealed that, in June 2019, the number of buy-to-let mortgage products available reached 2,396 – the highest figure recorded since October 2007. The total number of available BTL products increased by 21% in the year from June 2018. There were some 143 new products brought to market between May and June 2019.
Further Moneyfacts research revealed that the number of products for first-time landlords reached an all-time high in July 2019. They doubled between 2014 and the summer of 2019.
Currently, two-year BTL fixed-rate deals are proving most popular among landlords. The percentage of landlords plumping for this type of deal in the final quarter of last year was 26%. This was a 12-month high. And up significantly from 8% the previous year.
This growth, revealed by Mortgages for Business, has been fuelled by the shorter Early Repayment Charge (ERC) periods typically attached to these types of products.
Shorter ERC periods enable landlords to refinance sooner without facing a penalty. Unsurprisingly, it was an option which grew in popularity in the uncertain political climate during the second half of last year.
The research also found that five-year fixed rates are still the most popular, while there has been growing interest in variable rates. The popularity of tracker and discounted rate products increased, up from 2% in Q3 2019 to 4% in Q4 2019. This came as landlords reacted to increased speculation that the base rate could be slashed soon. The base rate currently sits at only 0.75% – very low by historic standards.
Growing availability of limited company products
BTL landlords have faced some serious challenges in recent times. Not least the 3% additional surcharge on BTL homes and the phasing out of mortgage interest tax relief.
In the latter case, one increasingly popular way round this is for landlords to form limited companies (different tax rules) and place their property portfolio in there.
This growing trend has been reflected in an increasing number of BTL lenders offering limited company mortgages. Of the UK’s 49 BTL lenders, 31 now offer this type of mortgage.
It’s advantageous from a tax point of view, but incorporating typically means higher rates. Rates available to landlords borrowing via a limited company were on average 0.7% points higher than those available to individual landlords in Q4 2019.
On the upside, the number of products available to limited companies for both two-year (288) and five-year fixed rates (322) grew last quarter.
Lastly, the data revealed that the number of BTL mortgage products available rose by 72 to 1,981 in Q4 2019. This was up from 1,909 in the previous quarter. The number of BTL products available to limited companies rose by 51 to 738 up from 687 in Q3 2019.
When it comes to mortgages, and the best and most tax-efficient options on offer, it’s best to consult a mortgage and tax expert for their advice. Earlier this year we produced a 2020 BTL Mortgage Guide to help landlords come to terms with this particular area. It covers everything from the growth of BTL mortgages to regulation and interest rates.
Here at Atkinson McLeod, we offer guidance on renting and letting a property in the capital. To find out more about our services, please get in touch with our expert team today. You can find out how much your rental home could be worth on the current market by requesting a a free and instant online valuation here.